Gold VS Bitcoin Showdown

source: JM BULLION
In an age of digital enterprising, it is not uncommon for an individual to have to purchase an item online or make their payments through a website. However, recently, one man has taken the online payment process a step further by creating a brand new form of virtual currency known as Bitcoin.

What is Bitcoin and How is it Used?

Bitcoin’s origin stems from a paper that was published in October of 2008. This paper outlined an online transaction system in which customers could make and receive payments without the involvement of any banks or credit/debit card companies. It revolved around a virtual form of currency known as the bitcoin. The bitcoin provided customers with a universal form of currency that they could spend at any participating website without having to concern themselves with the present currency exchange rate. It was primarily geared towards businesses with an international clientele. During its first year of release in 2009, the bitcoin was met by a wide range of responses. For many businesses, the response was fairly positive as the bitcoin enabled them to expand their customer base by international proportions. Even local businesses such as pizza parlors benefited from the bitcoin since it allowed their customers to pay online. Unfortunately, the bitcoin also encountered a substantial amount of criticism. In July of 2011, the Bitcoin system was penetrated by hackers, consequently raising great concern over its security. Further contributing to this backlash were the many disreputable and illegal businesses that were using bitcoin to facilitate their transactions. Among the scandals that Bitcoin was entangled in were Silk Road and Mt. Gox. Still, despite such setbacks, Bitcoin has persevered, ultimately attracting more reputable businesses and customers. Today, the bitcoin continues to gain recognition as a legitimate form of currency by not only mainstream businesses, like Overstock.Com and the Chicago Sun-Times, but also by the IRS, who has had to create specific tax guidelines for this method of payment. Its success has even reached the point that in November 2013, its value surpassed gold. Such market activity raises questions over whether the bitcoin will eventually become a more valuable asset than gold.

What is Gold and How is it Used?

The history of this precious metal goes back at least 2,000-3,000 years. While gold is primarily thought of as currency, many ancient civilizations also used it to create jewelry, decorative ornaments and in some cases, even medicinal equipment. Its first documented use as currency was in 600 B.C. by the Turks. This practice continued for a number of centuries until the mid-1800's, when many countries began shifting away from the use of actual gold currency in favor of a system known as the “Gold Standard.” Under this system, individuals could simply use paper money to represent the gold’s value. The US would use this system from 1861 until 1934. Unfortunately, the demise of the gold standard would abolish the use of gold as either a form of currency or as the basis for its currency. Today, gold serves primarily as an investment asset that allows investors to make profits through the fluctuation of its market value.

Bitcoin vs. Gold

In many ways, gold is the precious metal counterpart to the bitcoin. Like the bitcoin, gold must be obtained through mining. But, while gold is obtained through physical mining, bitcoins must be “mined” virtually through the deciphering of special computer encryptions. Another similarity is that both gold and bitcoins are only available in limited quantities. It is estimated that there is approximately 171,000 metric tons of gold in the world, while the Bitcoin system will only be able to generate and support a maximum of 21,000,000 bitcoins until further technological advances are made. Given such similarities and their individual market activity over the past few years, it is understandable why many believe that bitcoin could ultimately replace gold in terms of value. However, in spite of this evidence, there are a number of reasons why this shift is unlikely to occur. The first reason that the bitcoin will never replace gold is because it still poses a great deal of financial risk. Despite its recent peaks in market value, the bitcoin continues to experience significant price fluctuation that often results in substantial losses. Furthermore, both the future and the viability of the bitcoin have yet to be determined, leaving many customers wary over the the security of their virtual savings in the event that the system becomes terminated or obsolete. With such instability and uncertainty surrounding the bitcoin, it is unlikely that it will generate the customer base to match, much less surpass, gold as an investment asset. Another reason that the bitcoin is unlikely to replace gold as an investment asset is that the system has yet to achieve full status as a truly "universal" and legitimate form of currency. Many countries, including Germany, Norway, Russia, France, Thailand and Korea, refuse to use the bitcoin for fear of potential loss. In fact, several have gone as far as making it illegal in their country. In contrast, there isn't a country in the world that would ignore the value of gold, much less prohibit its use. Therefore, until the bitcoin can reach the same worldwide level of legitimacy and approval that gold has, it will never be able to replace gold as a valuable commodity. The final reason that the bitcoin is unlikely to surpass gold as an investment commodity is that gold has consistently demonstrated signs of recovery since it plummeted by 28% in 2013. Many people presumed that the sudden drop in gold's market value was an indication that it had lost its status as a safe investment choice. However, a number of signs, such as the increase in debt-to-GDP ratio and the increase in the price of mining, suggest that gold will not only recover from its drop, but it will continue to thrive as a popular investment commodity. Consequently, as long as investors believe that gold can generate profits, they will continue to forgo any other potential replacements.